Carbonite 2011 Annual Report Download - page 25

Table of Contents
Our software contains encryption technologies, certain types of which are subject to U.S. and foreign export control regulations and, in some
foreign countries, restrictions on importation and/or use. Any failure on our part to comply with encryption or other applicable export control
requirements could result in financial penalties or other sanctions under the U.S. export regulations, including restrictions on future export activities,
which could harm our business and operating results. Regulatory restrictions could impair our access to technologies that we seek for improving our
solutions and may also limit or reduce the demand for our solutions outside of the U.S.
We may not be able to maintain control of our business in China.
The government of the People’s Republic of China, or PRC, restricts foreign investment in internet and online advertising businesses.
Accordingly, we operate our online backup business in China through an affiliated entity in China owned by an individual designated by us who is a
PRC citizen. We have entered into contractual arrangements with our affiliated entity and its individual stockholder that are intended to protect our
technologies and business. We have loaned funds to the designated individual in order to enable the individual to form the affiliated entity and obtain
any necessary licenses, including an Internet Content Provider (ICP) license, which was recently granted by the PRC government, and we expect to
continue to loan funds to the designated individual in the future. All loans are, and will continue to be, secured by the capital stock of the affiliated entity
and the designated individual stockholder has granted us the contractual right to exercise his rights as the sole stockholder of the affiliated entity.
We cannot assure you, however, that we will be able to enforce these contracts. We have no equity ownership interest in the affiliated entity and
we rely on contractual arrangements with the entity and the designated individual stockholder to control and operate the entity. These contractual
arrangements may not be as effective in providing control over the affiliated entity as direct ownership. For example, the entity could fail to take actions
required for, or beneficial to, our business or fail to maintain our websites despite its contractual obligations to do so. In addition, we cannot assure you
that the individual shareholder of the affiliated entity will always act in our best interests. If the individual stockholder of our affiliated entity fails to
perform his obligations under the respective agreements with us, we may need to engage in litigation in China to enforce our rights, which may be time-
consuming and costly, divert management resources, or have other adverse effects on our business, and we may not be successful in enforcing our
rights.
Enforcing agreements and laws in China is difficult and may be impossible because China does not have a comprehensive system of laws.
In China, enforcement of contractual agreements may be sporadic, and implementation and interpretation of laws may be inconsistent. The PRC
judiciary is relatively inexperienced in interpreting agreements and enforcing China
’s laws, leading to a higher than usual degree of uncertainty as to the
outcome of any litigation. Even where adequate law exists in China, it may not be possible to obtain swift and equitable enforcement of such law, or to
obtain enforcement of a judgment or an arbitration award by a court of another jurisdiction. The PRC government has exercised and continues to
exercise substantial control over virtually every aspect of the Chinese economy through regulation and state ownership. Many of the current reforms that
support private business in China are of recent origin or are provisional in nature. Other political, economic and social factors, such as political changes,
changes in the rates of economic, growth, unemployment, or inflation, or in the disparities of per capita wealth among citizens of China and between
regions within China, could also lead to further readjustment of the PRC government’s reform measures. It is not possible to predict whether the PRC
government will continue to be as supportive of private business in China, nor is it possible to predict how any future reforms will affect our business.
Specifically, the laws and regulations governing our business or the enforcement and performance of our proposed contractual arrangements with
our affiliated Chinese entity and the designated individual stockholder are relatively new and may be subject to change, and their official interpretation
and enforcement may involve substantial uncertainty. New laws and regulations that affect our business may also be applied retroactively. We
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